Searchlight Crusade http://www.searchlightcrusade.net/ "What you need to know about mortgages and real estate. And more." en Copyright 2024 Wed, 03 Jul 2024 13:58:49 -0800 http://www.sixapart.com/movabletype/ http://www.rssboard.org/rss-specification Results of Attack Recently, the page was attacked by people trying to send out spam. Evidently, Movable Type of the version I had is vulnerable, and updating within Movable Type is severely costly. The solution is I will have to move things to Word Press. It's going to take a while to get the old articles up. You'll know it has started when this message disappears, but it's going to have to be done manually. http://www.searchlightcrusade.net/2024/07/results_of_attack.html http://www.searchlightcrusade.net/2024/07/results_of_attack.html Wed, 03 Jul 2024 13:58:49 -0800 Mortgages and Reverse Mortgages (RAMs) after Retirement "Should People in their sixties take out a mortgage?" The short answer is "Not if you don't have to." Now if I suddenly vanish, the explanation will be that the loan industry put a contract out on me. Success in loans, and sales in general, is often attributable to selling people stuff they don't need. If you don't sell something, you don't eat. Getting people to call or stop by the office is expensive. The traditional idea of sales is that you have to make a sale at every opportunity, whether it really makes sense for the client or not. The various tricks of selling a mortgage to retired folks is a case in point. "It's a cushion," "It's there in case you need it," and all sorts of other stuff to that effect. Combine this with the "If you wait until you need it, you won't qualify!" and most folks who don't know any better will cave in and apply. This is exacerbated by the fact that most people seem to want to stay in the same home they raised their family in. This is understandable, emotionally, and often the worst thing you can do financially. Let's consider the typical three or four bedroom house with a yard, and the retired couple. It becomes more and more difficult, physically, for them to do the required routine cleaning, and even more difficult to do the maintenance and repairs that any home needs from time to time. Sometimes the kids are close enough and willing to help, sometimes they aren't. If their finances are tight in the first place, they get tighter and tighter over time. Into this environment comes the guy with a Reverse Annuity Mortgage (RAM) to sell. This is a special kind of mortgage, with a special protection for the homeowner (here in California, and in many other states as well) that they cannot foreclose in your lifetime. You cannot be forced out. Well, what if you're sixty-five and live to 100, as a far larger proportion of today's 65 year olds will? That's thirty-five years they are locking this money up for, and there is always the possibility that by the time they consider the cost of selling, etcetera, there will be no equity. The interest rates are significantly higher than a regular "A paper" mortgages, higher than most sub-prime loans, even, and the pay to the loan officers who do them is much higher than a typical loan. Lending is a risk based business, and that kind of lending carries its own risks. Who pays for the risk to the lender? You do. Especially as opposed to the typical loan where half have refinanced in two years and ninety-five percent in five, this is a long term loan they are being exposed to. Yes, the recipient could get cancer and die in a few years, but they could well survive that. The lender has no way of knowing what the interest rate environment for the money will be in a few years. So either the rate the clients get is variable, or the clients pay a higher rate to have a fixed interest rate. Once you start taking money out of the RAM, it starts earning interest. Since in the most common forms the homeowners are typically not making payments, it's usually compound interest. If you are making payments, it makes your cash flow even tighter, and you need to take more money. In either case, your balance is increasing, faster and faster with time, until you hit the limit, at which point you can no longer get additional money. This often happens surprisingly quickly, as you have the power of compound interest working against you. This all but guarantees that the family will have to sell the home, often for less than they could have gotten had they the luxury of a longer sale time. Furthermore, if keeping the home in the family is something you would like, a Reverse Annuity Mortgage is almost certain to torpedo the hope. Contrast this with the swap down option. Suppose instead that adult children buy a small place suited to the parents needs such as a condominium, and the parents live there, while the adult children live in the parents home. This minimizes cleaning, upkeep, and maintenance that the parents need done. If this won't work, another option is selling the home and buying something smaller. Remember, a RAM will almost certainly cause the family to lose the home anyway. You get more mileage out of cashing in the equity by selling, and investing the equity, than you will from borrowing against the equity. Instead of working against you, compound interest is on your side. Most states have laws preserving property tax basis if that's something that is advantageous. Let's say that with a $500,000 home, moving down to a $200,000 condo. Net of costs, you net at least $250,000 to invest, and let's say you do so at 7 percent, significantly less than a well invested portfolio. This gets you $17500 per year, or about $1460 per month, indefinitely, and you keep both the condo and the $250,000. Contrast this with taking the $1460 per month out of your equity. Even if you can find a RAM at the same 7 percent, the entire equity is gone out of your home in a little over fifteen years, and that's without including initial loan charges. Nobody can make you do this, and there are many reasons why you might not want to. But looking at it from a strictly financial viewpoint, it's hard to find the justification for a Reverse Annuity Mortgage. In fact, I have never seen a situation where I would recommend it from a viewpoint of financial prudence. There might be family situations that make it the "least bad" solution, but that doesn't mean it isn't bad. Caveat Emptor Original here]]> http://www.searchlightcrusade.net/2024/07/mortgages_and_rams_in_later_li_1.html http://www.searchlightcrusade.net/2024/07/mortgages_and_rams_in_later_li_1.html Mortgages cash closing costs payment RAMs Mon, 01 Jul 2024 07:00:00 -0800 Never Choose A Loan (or a Property) Based Upon Payment negative amortization loans and what is really going on, and why my 6% thirty year fixed rate loan was a better loan. Usually, they didn't believe me. Over 80% of people were in denial when I was done explaining how a negative amortization loan works. They so desperately wanted the Negative Amortization loan to be a real payment, and they trusted the guy trying to sell it to them. After all, he told them all about his little girl's soccer game, or whatever irrelevancy he used (like all the good sales books tell him to) to make him seem like a trustworthy human being. So I'll tell them about what is usually my favorite loan, the 5/1 ARM, but with an interest only rider instead of fully amortized. "Now I shopped eighty lenders for real loans and real payments that you would actually qualify for. Of all those lenders, this 6% was the best thirty year fixed rate loan for no more than one total point. But I have got this other loan over here that another lender is willing to give you. It's at 5.375%, and the payment is interest only to start with, so you'll only be writing a check for about $2015. How does that sound?" They'll say it sounds better but not as good as that other loan that the other guy is offering. Then I'll tell them the downsides, "That's okay, because this loan's rate will adjust starting in five years, and at the same time, it'll start to amortize, meaning your payments will go up. If the index stays where it is now, it will jump to 7.25% that first month after five years, and your payment will be over $3250 in that sixty-first month. Furthermore, you'd have had to pay over three points discount to get that rate. So adding $10,000 extra to your balance, and suddenly having payments $1200 per month higher, is the price you pay for cutting your payment about $650 per month. What do you think the price is for cutting your payment by $1250?" Well, as I've covered elsewhere, the price for a negative amortization loan in these circumstances, by whatever friendly sounding name they have for it, is a real rate two percent higher than you could have gotten, a balance that increases by about $70,000 over a five year period, and a prepayment penalty for the first three years, while your real rate isn't fixed even for one month, let alone 5 years. Selling by payment is the number one trick of unscrupulous people. You go out car shopping, and someone says you can get a $20,000 car for $608 per month, while the lot down the street says you can get a $25,000 car for $303 dollars per month, that second car sounds fantastic, right? Never mind that the loan is based upon a ten year repayment, and the interest rate is two percent higher than the three year loan the first car was based upon. Never mind that the second car dealer is actually going to give you a payment of $339 after they soak you for $3000 in bogus fees simply because you are so happy you got this wonderful car for what these suckers think of as half the price, and you're so happy with that payment that you don't watch what they're doing as closely as you normally would, because, after all, you're getting this car for about half price! Except that you aren't. Real estate, and real estate loans, are no different. You've got to be able to make that payment - the real payment, not the minimum payment. If someone's quoting you a payment that much lower for the same thing, there is a reason. But it is amazing the number of people who would never fall for the low payment line of patter out on the used car lot when they're talking about a car will fall for it the nice plush office in real estate that some of that money they soaked their suckers for bought. Those few I can get to own up admit to thinking of the mortgage loan as something akin to rent, which is kind of like thinking of your car payment like you would think of bus fare. Hey, here comes a bus that's seventy-five cents cheaper than the express bus right here - but this other bus is jam-packed, you can't get off until the driver's shift is over, and it's going in the wrong direction! Payment is not price. Many people know this but forget to apply it. The amounts at stake in real estate are usually many times the amount at stake in any other product aimed at consumers, and the chance of banks giving away that kind of money are correspondingly lower. The great rule that applies everywhere else applies equally strongly for real estate: Sales folk who try to sell by payment are trying to get you to pay too much, and not just for the item you are purchasing, but for the loan as well. I have helped folks who first bought their houses in the seventies for forty thousand dollars, and who now have four hundred thousand dollar mortgages on the same property. They have refinanced ten or twelve times and now they need to sell and are netting $20,000 instead of $450,000 they would have had if they had simply been more careful. One thing to remember is that you can never go backwards in time with what you know today. What is important is not just the type of loan, but the interest rate and the cost it takes to get it. Mortgage loans are not free - all of the people whose help is required do not work for free and you - the borrower - are going to pay for every penny they make in one way or another. Your greatest friend once you own a home is inflation, particularly if you've got a fixed rate loan. You only borrowed $X. Just because these dollars are now worth less does not increase the number of dollars you borrowed. If you have a fixed rate loan, or at least long enough to get through the period of inflation, you don't care that the interest rates on new loans are 14%. On a thirty year fixed rate loan, you've got this nice 6% loan locked in for as long as you care to keep it. Matter of fact, back in the late seventies, lenders offered these folks a much cheaper payoff to those folks who paid off such a mortgage early. But four years of ten percent inflation and that $400,000 loan is worth about $273,000 by the standards of the day you took it out, and all the folks who were laughing at you because your monthly cost of housing went from $1650 rent to $3000 mortgage are now paying $2350 rent and getting none of the deductions you are, while your costs are fixed and theirs are still riding the escalator up, and if they want to step off now, that property with a $400,000 loan is now $5100 per month! Nonetheless, choosing a loan based upon payment is financial suicide. If you cannot afford a real loan with a steady payment on the house you want, instead of a loan that messes you up for life, consider buying a less expensive property. Yes, everyone likes house bling, and the more expensive of a house you buy, the more leverage works in your favor. But, as millions of folks are finding out the hard way right now, if you can't make the real payment on a real loan, you are at the mercy of the market, and the market has no mercy. Caveat Emptor Original here PS: I actually like the 5/1 fully amortized and use it for myself. But I'm also aware of the potential downsides and understand what could happen - I'm just comfortable with the risks and like the lower rates for the same cost it usually has.]]> http://www.searchlightcrusade.net/2024/06/never_choose_a_loan_or_a_prope.html http://www.searchlightcrusade.net/2024/06/never_choose_a_loan_or_a_prope.html Mortgages closing costs payment rate/cost Mon, 24 Jun 2024 07:00:00 -0800 Differences Between Loans Look Smaller Than They Are cost of getting that loan? There's always a tradeoff between rate and cost, and focusing only on the rate ignores half of that very important equation. It turned out that they other folks wanted to charge him more than a point for the exact same loan I was able to do for no points. Seeing as this was a $340,000 balance payoff, it was the difference between a new balance of $343,000, with a payment of $1974.50 and monthly cost of interest of $1607.81, versus about $346,500 with a payment of $1994.64 and monthly cost of interest of $1624.22. Don't think that's a lot? Then consider the difference of $3500 in what you owe and $16.41 per month in cost of interest, every month you keep the loan. I've heard similar things from people I was offering a lower rate to, for less money. For instance, that was a 5.375% loan with a bit less than a point at that time. So for actually a bit less than a balance of $346,500, he could have had an interest rate of 5.375. In the interest of keeping things simple, I'll even use the same balance when it would have been a little less. That drops the payments to $1940.30 and the monthly cost of interest drops to $1552.03, saving over $70 per month! If you keep it a statistical average 28 months, that saves you $1960! If you keep it the full 30 years, that's a difference of over $19,000! But I can't tell you how many times I've heard, "Is that all you can save me?" Hello! Do you really need a better reason than thousands of dollars? It just doesn't seem like all that much, because people think in terms of payment. Clever salesfolk will seize upon this as a method of selling inferior loans to people who don't know any better. Salesfolk, after all, get the difference in pay for the loan right away. Therefore, they understand in their bones what a big difference those small differences make over time. If you multiply it out, you should understand as well. This is all real money coming out of your pocket! Far and away the biggest component of any new loan is what you already owe, or what you've agreed to pay to acquire the property. The fact that the base loan is for $300,000 or so can make differences seem small, but I guarantee it wouldn't seem small if someone was asking you for $3500 cash out of your pocket (not to mention most providers lying about cost)! I've said this before, but don't let cash make you stupid. $70 per month is $70 per month, every month for as long as you keep the loan, and money added to what you owe with this loan will quite likely still be there when you sell or refinance, converting it into a strict liability. That's money you won't have, and additional interest you'll pay because you don't have it! The fact that the base loan is a hundred times bigger may make the costs of doing the loan seem minor, but it doesn't make them any smaller in actual size. The differences may appear to be marginal, but they're not. Would you rather add $3500 to what you owe, where you'll pay interest on it, or keep it in your pocket, or at least out of your mortgage balance? No, it's not paying off your mortgage entirely, but it is saving you money. Over time - and most people will have mortgages for the rest of their working lives - it makes a substantial difference. If you refinance every three years like most people have been doing for the last generation, this makes a difference of $35,000 over thirty years. Would you like that money in your pocket? If not, well I can certainly always charge you more than my normal costs - it never hurts my feelings to be paid extra. Don't like that idea? Then perhaps that money is important to you, after all. Caveat Emptor Original article here ]]> http://www.searchlightcrusade.net/2024/06/differences_between_loans_look.html http://www.searchlightcrusade.net/2024/06/differences_between_loans_look.html Mortgages buyers loans prevention rate/cost refinance strategy Mon, 17 Jun 2024 07:00:00 -0800 Can You Get A Mortgage On a Condemned House? right now. If a house is condemned, you can't sell it to anyone as a house. Furthermore, with a condemned house on the property, it really isn't vacant land, either. It's less valuable than bare land, as you have an expense that vacant land does not. You have to pay for demolishing the structure and hauling away the garbage. You'll occasionally hear agents (me included) talking about "land less demolition and haul-away" describing properties like this. In the case of structurally damaged but repairable property, regulated lenders won't deal with it as a house either, although some may deal with it as if it were vacant land, less the cost of demolition and haul away. It depends upon lender policy. The only place to get loans upon structurally unsound or condemned property is a hard money lender. They don't have the Securities and Exchange Commission to answer to, and only much smaller responsibility to the Federal Reserve Board. Many of them are individuals holding the loans in their own name. They can do almost anything they want. If one of them can be convinced that the property can be marketed for a given sum, they will typically loan based upon that sum. It's all a matter of what they want to do. Hard money lenders will loan a maximum of only up to about seventy-five percent of whatever the marketable value of the property is, and the rates are unfriendly, to say the least. However, they may choose to lend in situations where a regulated lender can not. They can be your only option other than no loan at all. Most brokers will have at least a couple hard money lenders available to them, but your average direct lender cannot. As a final note however, before doing business with a hard money lender, you want to think long and hard and consult some experts as to whether you should - whether it's a good idea or not. It's well and good if this is a temporary thing and you can see an exit strategy to selling or more normal financing. But all too often, it's simply a way to delay the inevitable and make it worse at the same time. Caveat Emptor Original here]]> http://www.searchlightcrusade.net/2024/06/can_you_get_a_mortgage_on_a_co_1.html http://www.searchlightcrusade.net/2024/06/can_you_get_a_mortgage_on_a_co_1.html Mortgages law lender requirements practices public records Tue, 11 Jun 2024 07:00:00 -0800 Still Debating Buy Versus Rent? Run Your Own Numbers BuyHomevsRent.xls It's in Excel 97. I suppose I could convert it forward, but my current copy of Excel has no problems with it. It compares cost of renting and investing the difference versus a home purchase. I wrote three different scenarios into the spreadsheet: Never refinance, refinance every five years but keep making payments with an eye towards having zero balance thirty years after you originally bought, and refinance every five years and make the minimum payment on the new thirty year loan. The sheet "Front" should be where you start, in case one of the others comes up. You enter your own values for the numbers down the left side of the sheet. Purchase Price and down payment should be self explanatory value adjustment was a feature I put in to adjust to what other, equivalent properties might sell for assumed appreciation of the property interest rate of the first mortgage (TD=Trust Deed) interest rate of the second mortgage: given the market at the time, I assumed anything over 80% of value (Lesser of Cost or Market, i.e. lower of appraisal or purchase price) would be on a second trust deed. These days, second mortgages over 90% CLTV are not available. If you're all one loan, simply enter the interest rate of that loan in both loan rate boxes. property tax yearly property tax increase monthly cost of Homeowner's Association dues plus insurance (add in things like Mello-Roos payments here too), Assumed rate of inflation what it would cost to rent an equivalent property instead the cost of refinances I wrote about earlier (I assumed a standard closing cost figure - no points, no rebate from yield spread) your standard deduction on federal taxes based on your filing status. The year I wrote this, the standard deduction for married filing jointly was $10,100. For 2020 it will be 24,200. If your status is something else, you can look up your standard deduction any number of places. The point is, you get this much of a deduction anyway - it's not accurate giving benefits from the home ownership deduction until you have actually exceeded the deduction everyone gets. Value of your other federal income tax deductions. Just as it's not accurate giving benefits until you exceed the standard deduction, it's not an accurate comparison to withhold other deductions over the standard amount that you'd get. Your marginal federal income tax rate - what you paid on your final dollar of income for the year. The spreadsheet does lose accuracy if your marginal rate changes due to the deduction - or would change without it - but that's a small effect and trying to compensate would have been extremely speculative, especially given how much playing with where certain deductions and credits peter out on the income scale. Finally, the assumed rate of return of an alternative investment into which you would put 100% of the difference between the monthly payments of buying versus renting (as well as the down payment money). Speaking as someone who still had financial planning clients at that point, that's a ridiculously generous assumption, but you might be one of the exceptions. Caveat Emptor Original article here]]> http://www.searchlightcrusade.net/2024/06/still_debating_buy_versus_rent_1.html http://www.searchlightcrusade.net/2024/06/still_debating_buy_versus_rent_1.html Mon, 03 Jun 2024 07:00:00 -0800 Lenders Adding A Prepayment Penalty After Funding I recently closed a mortgage loan. The loan officer told me there would be no prepayment penalty. When the documents came there was none and the loan funded and closed. Two weeks later I got an e-mail stating some documents had been missed and we need to sign and return them. They contained a new TIL, prepayment rider and addendum. The original TIL states there is no prepayment penalty. I have not signed these and the lender is telling me I have to because of the compliance agreement. Is this true? Talk about scummy behavior! I wouldn't sign the new documents. As a matter of fact, talk to your state's department of real estate about this behavior immediately. I hope that whoever is responsible for this loses their license to do loans in your state. You also will want to consult an attorney, as a precaution. A lender attempting to modify the contract after funding requires your consent. This strikes me as a a good candidate for fraud, depending upon the particulars of the contracts. Explain to them that you would not have signed the documents had this been presented as a condition of your loan funding, and so to attempt to alter the contract ex post facto (after the fact) is, in some cases, grounds for a prosecution based upon fraud. That contract is a two-sided document, freely agreed to as it originally was by both parties. The fact that the loan funded is evidence of this. I have never heard of needing to sign a pre-payment agreement as a compliance procedure after the fact - except to comply with getting that lender paid more, via the secondary market. A pre-payment penalty adds anywhere from 3 percent of the loan amount up to almost ten percent to the price the lender will receive when they sell your loan, and they probably figured, "Why not try for the extra?" Or they may have intended this from the beginning, giving you a great quote to lure you in, figuring to make their margin with the pre-payment penalty they were hiding. It's amazing and disgusting how often people will sign such documents. Unlikely as this is, if it did happen, boy could you have gotten a great loan out of it. If lenders could require this sort of thing, they could unilaterally change the agreement any way they want to after funding. So what if you signed a thirty year fixed rate loan at 5.5 percent and paid three points to get it? You new rate is eight percent, "for compliance"! According to everything I know about contract law - which is limited, because I'm not an attorney and you should talk to one - they have no legal grounds to demand this of you. At the very least, it would be the case that signing these documents is what starts the clock on the the three day right of rescission. That the lender funded the loan before then is evidence of a severe error on their part, and when you rescinded, they would have to restore you to the situation as it existed prior to you signing the original documents. There are also legal issues with the fact that they're trying to alter the Truth In Lending form. Since the beginning of 2010, changing the APR less than seven days before signing final loan documents is an offense against federal lending law. If you get a sharp enough attorney and help from your state's regulators, it's very likely that you might get yourself some really significant loan concessions, or possibly even a settlement from the lender. Every state's laws are different, so you need to talk to your state's department of real estate, and I do strongly recommend consulting an attorney before you draw any lines in the sand, but this is my best understanding of the situation. Caveat Emptor Original article here]]> http://www.searchlightcrusade.net/2024/05/lenders_adding_a_prepayment_pe.html http://www.searchlightcrusade.net/2024/05/lenders_adding_a_prepayment_pe.html Mortgages competition disclosure law penalty practices Mon, 27 May 2024 07:00:00 -0800 "All Mortgage Money Comes From The Same Place" every loan would be hard money. No lender has the capability of running programs that are good fits for everyone. Some of them have a few dozen, some have only ten or twelve. This sounds like a lot, but it isn't. Every single loan type is a different program. Just to cover the most standard loan types for their market is usually between twenty and thirty different programs. Back when I originally wrote this, I could point to lenders with twenty-five or more different Option ARM programs. They're gone now (quite predictably) but they sure looked like they were doing well for a while on the surface. This is where brokers and correspondents come in. There's an old saying about how "If the only tool you have is a hammer, pretty soon all the problems start looking like nails." You walk into a direct lender's office, and they has a couple dozen programs focused on one segment of the market. You're not an ideal fit for any of their loan programs, but so long as you can qualify for any of them, they are going to keep your business rather than refer you to someone else. They're hammering nails, never mind that your problem is a threaded bolt. They get you pounded into the board. Yes, you get a loan, but you could qualify for a better one if you wandered into a different lender's office. Brokers and correspondents have lenders wandering into their offices. Lenders who will give the brokers better deals than they give their own loan officers, because they're not paying for the broker's expenses, and the broker knows better than to be a captive audience. The fact is that brokers are usually capable of getting a deal that's enough better that they can pay their expenses and salaries, still have profit left over, and nonetheless offer the client a deal enough better than the lender's own branches as to be worth the trip. Brokers also shop multiple lenders, looking for a better fit. If you're a top of the line A paper borrower, someone that any major bank has a good program for, the broker can still get you a better loan, but maybe only by as little as an eighth to a quarter of a point. On a $300,000 loan, that's $375 to $750 in cost at the same rate for the exact same loan. If you're in a marginal A paper situation, the difference made is liable to be that you qualify A paper with a broker who knows where to shop, where you'd likely have to go sub-prime, with inferior options and a prepayment penalty, by walking into a bank office. You get into sub-prime situations, and I have seen pricing spreads of two and a half percent on the interest rate between the best lender for a given loan, and the rest of the pack. The fact that most subprime lenders are gone and the ones remaining have radically changed their business model only accentuates this. You can physically go to twenty or fifty different banks, fill out an application and furnish paperwork in each - or you can go to a broker. (Correspondent lenders are brokers with one difference: They initially fund the loan before selling it to the lenders whose standards they met. The loan is still written to the real lender's standard, underwritten by their underwriters, etcetera) The point is that no lender is both offering low rates and loose underwriting. As everything else having to do with money, it's always a trade off. The lenders charge higher interest rates, they get a better price for their loans. The lenders underwrite to tougher standards so they will have fewer defaults, and practically zero losses, they get a better price for their loans. The lenders need a certain margin to keep their owners happy, and a certain margin to keep investors happy, and neither one of those in the business of giving away money for less than it is worth. The ideal thing for a given borrower is not an easy loan. Unless you're so high up on the ladder of borrowers (credit score, equity in the property, lots of documented income) that you'll qualify for anything easily. The ideal loan, where you get the best trade-off of rate and cost, is to find the loan where you just barely scrape through the underwriting process. With average loan amounts in California being about $400,000 now, chances are that any extra time and effort you spend will be handsomely rewarded when you compute the hourly costs and payoffs. So you see the partial truth of the title statement, and the utter falsehood. All mortgage money pretty much does start out in the same place, if you want to look at it that way: the pool of investors looking to loan money. Nonetheless, what happens to it after that, before it gets to the consumer, renders the statement "All mortgage money comes from the same place" incredibly dishonest. Caveat Emptor Original here]]> http://www.searchlightcrusade.net/2024/05/all_mortgage_money_comes_from_1.html http://www.searchlightcrusade.net/2024/05/all_mortgage_money_comes_from_1.html Mortgages competition credit loans markets rate/cost Mon, 20 May 2024 07:00:00 -0800 In Order To Deal With Looming Foreclosure, You Must Get Out of Denial "hard money" lenders. Unfortunately, the one undeniable requirement for hard money lenders "rescuing" someone in this situation currently is a Loan to Value Ratio below 70 percent. The current lender had a loan amount about $350,000, and represented it to me as a $550,000 plus property. Therefore, initial indications were that it could be worked with, and we set up a meeting with the owners. At that meeting, I found out the address and characteristics of that property. That wasn't a $500,000 property. In fact, it might have been worth $370,000, absolute maximum, in the market at that time. Three words about the likelihood of any new loan: Absolutely none whatsoever. A paper, Alt A and A minus are certainly not going to touch that loan - even if the Default were to suddenly vanish, the effects on the credit score would have driven the borrowers below their minimums. Even with the ability to document enough income, subprime isn't going to touch a defaulting borrower at 95 percent loan to value ratio in the current market - and that's without rolling one penny of costs or penalty into the new loan. That leaves only other hard money lenders, and if there's one great constant about hard money, it's that they absolutely will not go over 75% loan to value ratio, ever. In fact, their limits are usually 65 to 70. These folks could not refinance with any lender out there. They can't afford their mortgage - no way. Even had they protested to the contrary (they didn't), they wouldn't have been in foreclosure if they could have come up with the money. Unless they've got a wealthy relative who will save them, they're going to lose the property, and if they had that kind of benefactor, why hasn't he appeared before now? The only mystery about the entire situation is the precise mechanism whereby they're going to lose the property, and precisely how badly they will be hurt. Now from some of the code phrases that the hard money lender they're already with dropped, I am pretty sure he knows this - he's just hoping for another sucker to volunteer to take his loss by refinancing his loan out. Well, I'm not going to knowingly commit that sort of blunder. Nobody sane is. Do you think even the stupidest brokers haven't figured out they're going to be liable for bad loans by now? HVCC and other disastrous regulation imposed from without (I'm looking at you, Barney Frank) made market recovery much more difficult. But when I asked him about waiting, he represented that "I need my money now." Well, that's fine and that is his right. However, if he needs it now, he's not going to get all of it. What he was really trying to do of course, is build a path of least resistance where I hose myself, the new lender, and the owner so that he can walk away with every penny that's technically "his." Like any sane loan officer, I'm going to decline to do that - the money I might make no in no way compensates for what's going to happen later. Questions of ethics and whether the loan should have been made in the first place aside, he willingly undertook that risk when he made that loan, and he was richly rewarded for doing so by an interest rate well into double digits. Even the stock market doesn't return that kind of money over time, and it definitely doesn't do so without risk. But evidently nobody covered that with him in "Loan sharking 101." So when I did the logical thing and started talking to the owners about minimizing damage, he freaked out. He said I'd lured him there "under false pretenses," and that was before I had said one word about short sales. Nothing could be further from the truth; he was the one who led me to believe the situation was other than it was, and everything I had said was explicitly predicated upon the representations he made to me over the phone. But he saw his carefully constructed scenario collapsing in front of his eyes, and he didn't want to accept that collapse. Unfortunately, the consumers involved were Spanish speakers, and he spoke much better Spanish than I do. I've written about sharks marketing to a given ethnic group in the past, and this appears to be a prime example. He hustled them out of the room, no doubt intending to look for some other sucker. Unfortunately for him but fortunately for everyone else, the loan officers who were willing to do that in my area have long since been forced out of business, and even the ones who may have gotten away with it in the past are not eager to take new chances in this environment, and I think that's a very good thing. For several years, the real estate and loan market was not much short of an ATM feeding cash out as quickly as it could. That has now changed. Instead of way too loose, loan standards have become way too tight as investors in full panic mode abandon all but the most perfect of borrowers. Many people who became used to the way the market was working in the last few years still don't understand that it has changed, why it has changed, and why it's not going back to the way things were the last several years. They're still in denial that, having bought all the rope necessary to hang themselves, they're now struggling with that rope around their necks some distance above the ground. It doesn't much matter if that distance is half an inch or several miles - they're in just as much trouble in either case. The sooner you get out of denial and accept the damage that has already been done, the sooner you will be able to limit future damage - and the damage does keep getting worse, There are alternatives that don't hurt as bad as foreclosure. Furthermore, there are those out there who will claim they can perform miracles, but they are almost always setting you up for a scam. Here's the bottom line: If you don't make enough money to make your payments and pay your real cost of interest, the best thing that can be said for you is that you're circling the drain. But if you'll make up your mind to get it over with, and deal with the situation based upon the facts, you'll come out with less long term damage. Not to mention more life still in front of you than would be the case otherwise. There really aren't any good reasons not to get past an unsustainable situation as fast as you can. Caveat Emptor Original Article here ]]> http://www.searchlightcrusade.net/2024/05/in_order_to_deal_with_looming.html http://www.searchlightcrusade.net/2024/05/in_order_to_deal_with_looming.html Buying and Selling cost of money default loan qualification payment prevention strategy Mon, 13 May 2024 07:00:00 -0800 "Should I Refinance?" - Consider Overall Cost of Money, Not Payment negative amortization loan. I've seen them with minimum payments computed based upon a nominal rate of zero point five percent on forty year amortization. This gives a minimum payment of $1150 for a $500,000 loan - but the actual rate on that loan is eight point two percent, meaning if you were just going to pay the interest, that would be $3417 per month. If you made that $1150 minimum payment, you'd owe over $2200 more next month - and you'd be paying interest on that added principal as well. By comparison, principal and interest on a six percent thirty year fixed rate jumbo loan is only $2998 - and there's no prepayment penalty either. Don't get distracted by payment. Look at the real cost of the money - what you're paying now in interest, versus what any new loan will cost, plus what you'll be paying in interest on it. You do have to be able to make the payment, but once that's covered, look at the real cost of any new loan, both in up-front costs and in interest paid per month. Those are the important numbers. Let's suppose you were one of those folks who had to settle for a subprime loan a couple of years ago. You had something bad happen, but now you're past it. You've been diligent and careful with your credit these last couple years, so you're now able to qualify "A paper". On the other hand, your current loan has now adjusted to nine percent, and your prepayment penalty has expired, while there are now thirty year fixed rate loans in the sub- five percent range. When I originally wrote this I could have moved you or anyone else able to qualify A paper into a thirty year fixed rate loan at about 6% for literally zero cost, meaning there is no possible (financial) reason not to do such refinance as long as it lowered your rate even slightly. (These days, thanks to Congress trying to "protect" consumers, zero cost loans may still be here, but we can't call them that.) The only real question in such a situation is this: "Is it worth the extra money it takes to get a better rate?", because there is always a tradeoff between rate and cost. For instance, to look at the differences for someone who currently has a $300,000 loan, when I originally wrote this two of the choices were six percent for zero cost or five point five for about half a point. Both are thirty year fixed rate loans. The six percent loan has a balance of $300,000, same as your old balance, and payments of $1798.65. The five point five percent loan carries an initial balance of $304,325, and payments of $1727.90. Lest you not understand, that 5.5% loan cost you $4325 to get done, as opposed to literally zero for the six percent loan. This isn't a matter of "keep searching for the provider who gives you the lower rate for the same cost", as this tradeoff is built into the entire financial structure. Some providers may have higher or lower tradeoffs, but the concept of the tradeoff isn't changing for anything less than a complete and radical rebuild of the financial markets. Not. Gonna. Happen. You can find different costs for the same rate, but the difference between a low cost provider and a high cost provider usually isn't going to be more than two points on the cost. However, for spending that money all in a lump sum, you get a lowered cost of interest. You save $105.19 that first month in interest, and this number actually increases slowly for the first few years of the loan. In month 21, you've theoretically broken even, even though your loan balance is still almost $3600 higher, you've gotten the extra money you've paid to get the lower rate back. However, because you still owe $3600 more, if you refinance at this point, you're still going to end up behind as that $3600 you still owe translates to $216 per year at 6%, assuming that's the interest rate on your next loan. Maybe you sold the property and bought something else, maybe you refinanced for cash out. In either case. you owe $3600 more than you would have, which means you're paying interest on it when you get your next loan. But something like thirty percent of all borrowers have sold or refinanced by this point, and when they do, those benefits you paid for stop. Nor do you get any of the money you paid in the first place back. It isn't until you've kept the loan 124 months - over ten years into the loan - before you are unambiguously better off with the lower rate but more expensive loan. That's how long it takes until the balances are even on the two loans. Of course, by then you have saved about $13,000 in interest - if you actually keep the loan that long. Less than one borrower in 200 does. Real break-even is likely to be somewhere in year four in this case. After three years, you've saved about $3800 in interest, and if your balance is still that almost much higher with the expensive loan than the cheap one, we're getting to the point where time value of money will keep things in favor of the more expensive upfront costs. Of course, last time I checked Statistical Abstract, decidedly less than half of all borrowers kept their new loans this long. Something to think about, because you don't get the money you spent to get the loan in the first place back. By the end of year four, assuming we keep the loan that long, we've saved $5000 in interest, while the balance is only $2600 higher for the 5.5% loan than for the 6% loan. Even without time value of money and with a ten percent assumed rate of return, that's additional twenty years before the costs of the higher balance catches up with the benefits you've already gotten through lower interest. Considering time value of money, it's really never going to catch up. So when you're looking at refinancing, don't just consider rate and payment. Consider what it's going to cost you in order to get that new loan, and remember what the costs are of doing nothing (i.e. you've already paid the upfront costs of doing nothing). Many people refinance every two years, spending much more than $3400 every time they do, because they'll spend two or three points to get the lowest rate. This, as you can see now, is a recipe for disaster. Caveat Emptor Original article here]]> http://www.searchlightcrusade.net/2024/05/should_i_refinance_consider_ov.html http://www.searchlightcrusade.net/2024/05/should_i_refinance_consider_ov.html Mortgages cost of money loans payment rate/cost Mon, 06 May 2024 07:00:00 -0800 What Drives Loan Rates? tough. The reason you borrowed ("rented") the money was because you have a use for it to make money. There's a lot fewer opportunities that make enough over twenty-one percent to make them worthwhile, than there are opportunities making enough over seven. This is one reason why inflation is a Bad Thing. What alternatives exist is a major factor on the supply side, as well. If you absolutely must invest your money in US Government securities, that's where you're going to invest, and since you're increasing the supply of money to the treasury, the price is less. Supply and Demand. This is one of the many reasons why Congress' handling of the social security trust fund is a national disgrace. If they were private trustees, they would be held liable for not investing it where the best returns are (as opposed to stealing 'borrowing' from in at zero interest via a virtual IOU). If, however, you think that stocks are looking more attractive now, that means that the supply of money for loans will shrink by whatever dollars you move out, and the rates will rise. The effect for any one person is small, but there are a lot of people in the market. In aggregate, it's many trillions of dollars. Supply and demand. Savings rates means a lot, also. When there is a lot of new money coming available in the borrowers market that money is going to be cheaper to borrow, in the form of lower interest rates. This is partially why rates went down throughout 2002, and stayed down into 2003, and 2004. People who had been burned in stocks wanted nice "safe" mortgage bonds. When there is comparatively little new money coming into the market, the only source becomes old loans being paid off. Negative savings or negative investments in the bond market means that what money is coming off older loans is at least partially being used to fund the withdrawals. Competition for money gets fierce, and price - by which I mean interest rate - rises. Supply and Demand. Competition for money is also a part of the demand side. When the government needs to borrow a lot, for instance, that increases the competition. Even on the scale of our capital markets, whether the government is breaking even or needs to borrow the odd $100 billion has a real and noticeable effect When they need to borrow $400 billion, you can bet it'll raise the cost of money. The government doesn't care, and the bureaucrats running the treasury have been told to get this money. They will do their jobs and get the money, whether it costs 4 percent, 14, or 24. Every time competition from the government drives up rates, a certain number of borrowers whose profit margin on the loan was likely to be marginal will drop out of the auction. But government spending rarely grows the tax base. It's those corporations and small businesses investing in future opportunities that grow the tax base, and they are the ones dropping out of the auctions as money gets more expensive. This is why government deficits are a Bad Thing. Supply and Demand. The desirability of the alternatives is another factor on the demand side, as well. There's more than one way to make money for most. If it become prohibitively expensive to borrow (bonds), sell part ownership instead (stock). There is a point at which even the most die-hard sole proprietor needs the money, and just can't afford it as opposed to selling some stock to new investors. This can dilute earnings, and cause you to lose control of the company (there were multiple reasons why the high inflation period of the seventies and eighties was followed by the era of the corporate raider, but that's one major part), but better to dilute your share of the pool by ten percent while increasing the size of the pool by fifteen. That is a net win, while borrowing the money at twenty-something percent is likely not. Now, let us consider the money supply here in this country, and thence the state of likely interest rates. We have increased government borrowing. We have the social security trust putting decreasing amounts of money into the government. We have a national savings rate that's negative (and it is the overall rate, not just working adults that we're concerned with, here). More and more people are becoming comfortable with foreign investment. And mortgage bonds are looking jittery right now, with foreclosures the way they are. Finally, no matter what the government propagandizes, we see the real inflation rate is substantial. Supply and Demand, remember? Therefore, in my judgment, we are likely to see raises in the interest rate, at least in broad. If you're on a short term loan that is likely to adjust in the next couple of years, the time to refinance is now, unless you're planning to sell before it adjusts. (If, on the other hand, you have a long term fixed rate loan, stay put. Once you've actually got the loan funded and recorded, they can't just draw the money back unless you do something like fraud or default. Even if you go upside down on your loan for a while, if you're already in a fixed rate loan, that's okay. The market price of the home only matters at loan time and at sales time. If you don't need a loan and you don't plan on selling, why should you care? Oh, and one final note to the young: home prices will rise again. Sooner than you probably think, around here.) Caveat Emptor Original here]]> http://www.searchlightcrusade.net/2024/04/what_drives_loan_rates_1.html http://www.searchlightcrusade.net/2024/04/what_drives_loan_rates_1.html Mortgages economics macro markets Tue, 30 Apr 2024 07:00:00 -0800 The Biggest Risk now, much less forty years from now with average inflation. Matter of fact, it's only about a 1.67 times overall return net of inflation. $100 per month is a lot less than people should be investing for their own future, but it's indicative of the problem. Even if you contributed $1000 per month, which is more than most people can commit, between however many tax-deferred investments it takes, it's $1.74 Million, which goes to a payout of $10,000 or so per month if you annuitize at 65. Sounds like a lot of money today, right? But you're spending those dollars all in an environment where, at an average of 3.5 percent inflation between now and then, $10,000 per month is about the equivalent of $2500 per month now - and every year that passes in retirement, your money buys less. Suppose, instead, you were to invest $500 per month - half what you had to come up with in the previous example - and invested it in the broader market, earning a 9 percent return, well below historical average market returns, and then in the final year you lost forty percent of your money due to a market crash? Think you'd be better off, or worse? Slightly worse off, in raw numbers. $1.40 million ($2.34 million before the crash). For half the effort to save and despite a major investing disaster at the worst possible time. But then let's say you manage to retain your intestinal fortitude, and instead of annuitizing on a fixed basis, you simply withdraw the same $10,000 per month we had in the previous example, while leaving the rest invested and generally earning 9%. Your money keeps increasing, and if you live to age 95, you leave 2.23 million dollars to your heirs, a sum that, if not so great as it sounds, will still buy a decent house in most areas of the country seventy years from now under our assumptions. Now let's say that you want to live the same lifestyle, equal to $2500 per month now, that you have at retirement, so your monthly withdrawals increase by 3.5 percent per year. You didn't even have this option in the fixed rate "guaranteed" examples. Your money lasts 19 years 3 months (plus a few thousand left over). Once again, for half the effort to save. This is not wild risk taking. This is simply doing exactly what the insurance companies are doing, and assuming the investment risk yourself. Do not think for a minute that banks and insurance companies are insulated from failure if the market conditions go sour enough. They aren't getting the money to pay you from some kind of transdimensional vortex. If their investment results are bad enough so that they can't pay you, they won't. Government bailouts are also limited, and the government's guarantee programs are likely to undergo severe modification in the next forty years, as they deal with problems such as social security and medicare payouts that are much larger than what their pay ins will be. States, which generally stand behind insurance company guarantees, will not likely be in a stronger position than the federal government. Not to mention the kind of impact this sort of financial crisis will have upon government budgets. Speaking of the banks, let us consider a hypothetical four percent CD, on a "taxed as you go" rather than tax deferred basis. Assume 28 percent federal tax rate, and 7 percent state and local. $1000 per month invested, every month for 40 years. How much does it turn into? $842,800. As opposed to $1,044,600 just to break even with inflation at 3.5 percent per year and being able to buy the same stuff. I'd snark that you might as well bury it in a mattress, but in point of fact, that would only get you $480,000. The point I'm trying to make here is that the so-called traditional "conservative" investments are anything but. If you aren't putting your money into investments where there is some market risk, then the only guarantee you have is the guarantee that it won't succeed, the guarantee that you will be living in poverty or forced to somehow keep working your whole life. So in financial planning, the biggest risk is in not accepting some. Caveat Emptor Original here]]> http://www.searchlightcrusade.net/2024/04/the_biggest_risk_1.html http://www.searchlightcrusade.net/2024/04/the_biggest_risk_1.html General & Misc. Planning financial investing risk Mon, 22 Apr 2024 07:00:00 -0800 First Time Buyer Programs: The Mortgage Credit Certificate (MCC) originating lender. This means the people who take the loan application. This program is emphatically open to loan brokers. If the broker participates, it does not matter whether the funding lender participates, because it is not required that the funding lender participate, only that the originating lender participate. There is a nonrefundable upfront fee involved. This fee is paid to the authority administering the program. Some brokers may front this money on your behalf, but they will expect to be paid back several times over upon funding. Remember: There is no such thing as a free lunch. Your lender submits the application and the fee, and receives an approval from the authority on your behalf. This approval is good for up to 120 days, and in most cases, it may be transferred to another property if this escrow falls apart (albeit with conditions). What does it actually do for you? It converts part of your mortgage interest tax deduction into a direct tax credit. 20% of your mortgage interest, to be precise. This applies to both first and second mortgages on which interest is being paid and payments are being made. It does not apply, however, to first time buyer assistance loans on which there are no payments, or only nominal payments. Let's do some math! Let's say you're buying a property for $400,000, using 100% financing (This was valid and common at the time I originally wrote this, and likely will be again, but it isn't available right now). Of that, $320,000 is a first mortgage at 6%, and $80,000 is a second mortgage at 10%. Let us examine the situation you should be familiar with, the normal mortgage interest deduction, first. This is the situation without MCC:

loan
amount
rate
interest
first
$320,000
6%
$19,200
second
$80,000
10%
$8000
total
$400,000
blended 6.8%
$27,200

You also have property taxes of $5000 per year (California rule of thumb. Yours may vary), which are deductible. Total: $32,200. The amount over this is deducted from your income before computing tax. The net benefit to you is based upon what exceeds the standard deduction you'd get anyway. For married couples, this was $11,600 in 2011. $32,200- $11,600 = $20,600, at a 28% tax bracket, sees a net benefit of $5768. This shaves $480 per month off of your federal tax bill. Now let's look at the situation with MCC:

loan
amount
rate
interest
20%credit
80%deduction
first
$320,000
6%
$19,200
$3840
$15,360
second
$80,000
10%
$8000
$1600
$6400
total
$400,000
6.8 blended
$27,200
$5440
$21,760

So you get a $21760 deduction and a direct tax credit of $5440. Your deductions total $26,760 with property taxes, using the same numbers from the first scenario. Less $11,600, your real deduction is $15,160, times 28% tax bracket is $4244.80. That's the reduction you see on your taxes due to the deduction. You'll also see a tax reduction due to the credit of another $5440, for a total of $9684.80 tax benefit, or $807.06 per month. That's over sixty percent more you save off of your federal taxes. What's more, is because the credit is a known number, not subject to alteration as to your deduction status or other tax situation, it can be used to help you qualify for the loan, increasing the loan you qualify for. That $5440 credit works out to $453.33 per month that can be used to help you qualify for the loan. When I first took the training, I thought I'd have some interesting arguments with nonparticipating lender underwriters, but that has worked out not to be the case. Why? Because the money runs out so damned quickly. There are fresh allocations twice per year, and it's usually gone within thirty days at most. When the budgeted money is gone, there are no Mortgage Credit Certificates available. Oh, there is usually plenty of money for the very lowest income bracket but basically nobody in that bracket is actually able to buy a qualifying property. When a single mom who can barely afford a condo is in the "Middle income" bracket for which the money is gone two weeks after the allocation is received, how much sense does it make to reserve roughly half the money for a "low income" bracket that can't afford a damned thing? Participation in this program is not universal. There are fees to be paid, and some cities can't or won't. Many entire states do not participate. In other cities, there is no qualifying housing. For instance, within the county of San Diego, the City of La Mesa was not participating when I first took the training, although they have since returned to the program. The Cities of Del Mar and Solana Beach also do not participate, due to the complete lack of qualifying housing within those two cities. There are basically three qualifications, in addition to submitting your request to the correct regional program and buying a property in a participating area. First, you cannot make more than the appropriate income limits. In San Diego County in 2014, this is currently $80,600 per year for a household of one or two persons, $92,690 for a household of 3 or more persons. Qualifying income adjusts annually. Second, MCC is valid for owner occupied dwellings only. You must occupy the home, or intend to occupy it as soon as the purchase is finalized, and then you must actually occupy it. Therefore, only single family occupancy properties are eligible; no duplexes, apartment buildings, or other properties with more than one living unit. Condominiums are fine, as are manufactured homes on owned land, as these are both single family dwellings. If you move out, you will lose the benefits of this MCC. As a side note, any tenants displaced by this program are entitled to compensation from the program, so if the current owner is renting to someone other than the prospective buyers, expect the application to be refused. It must be vacant, owner occupied, or rented by the prospective purchasers. Third, and finally, the property must be within the maximum limits for size of the purchase. In San Diego County, these limits are currently $643,847 for a resale property, $643,847 for a newly built property being sold by a developer. In some "targeted" census tracts, specifically designated due to their low income, the qualifying limits for the purchase are higher: Currently $786,924 for resale, $786,924 for brand new properties. About these census tracts, more very soon. Now, what is a first time buyer for purposes of this program? A buyer qualifies if they have not owned their primary residence for three years or more. This is proven via federal income tax returns. You may own another property off far away somewhere else, too far away from your job to commute, at least according to the interpretations I heard. There is a way for people who are not first time home buyers under this definition to take advantage of this program. Remember those "targeted" census tracts I talked about two paragraphs ago? If you buy in one of those "targeted" census tracts, it does not matter if you're a first time home buyer or not. As long as you meet the other criteria, most particularly including owner occupancy, you are eligible. These targeted tracts change with every decennial census. We're in the middle of such a period now, so no changes are anticipated soon, but they do change from time to time. Now, there are some financing limitations on this program. It is aimed at people who really can afford the loans they are getting, and so these loans must be done full documentation. Stated income loans or NINA/No Ratio loans are not eligible. In other words, you must prove you make enough money to justify the loan. Furthermore, the emphasis is on being able to afford the loan. Negative amortization loans are not allowed with this program, nor are ARMs or hybrid ARMs with an initial fixed period of less than three years. Interest only loans are allowed, but they must be both fixed rate and interest only for at least five years. Finally, because the money comes from the same place as the CalHFA and Cal-Vet loan, it cannot be done in conjunction with those loans. I think MCC is a better program for the vast majority of buyers anyway. For instance, the MCC can be layered with a local purchase assistance program, which those cannot. There are two major flies in the ointment. The first is refinancing. The MCC dies when you refinance, unless you get it reissued. This involves another fee, and getting an RMCC (for Reissued Mortgage Credit Certificate), and doing so within a deadline. There are no income restrictions once you have the MCC on getting an RMCC, but if your property has ballooned in value 200% and you do a "cash-out" refinance, the RMCC will apply only to that portion of your loan that relates to your original loan amount. The second fly is the possibility of paying recapture taxes. This program was originally established under President Reagan, and people were selling the properties for high profit in short time frames. This caused it to be de-funded, as it was painted as causing windfall profits. But it proved popular enough that they brought it back, albeit with the recapture provisions. If you actually sell, as opposed to merely moving out and renting, within nine years of purchase, there's a formula for whether you'll have to pay taxes on the gain or not. But the maximum possible tax is half the gain, and the money they get helps them keep the program going. It has to do with how much your income was versus the guideline you qualified under, plus a yearly five percent adjustment for inflation and people earning more later in life. This is based upon the maximum qualifying income guideline, not what you actually made when you qualifies. Furthermore, it is waived in cases of death or divorce. In general, avoid selling in years you get a major windfall. It is to be noted that the competing programs have this recapture feature as well. When you weigh the advantages of the MCC against those of the competing programs, as well as against doing without such a thing, the value of this program to the middle income home buyer becomes clear. Indeed, this national program is probably the broadest brush, easiest to obtain home buyer assistance program there is. Funding is not unlimited to say the least, and here locally runs out almost immediately. Furthermore, a lot of lenders seem to sign up to lure first time home buyers in, and then direct them to loans that are not eligible for MCC; this is a major part of what motivated me to undertake the training myself. Furthermore, it's not free. But if you fulfill the requirements, the payoff is enormously better, at a cheaper price, than anything else of which I am aware. Caveat Emptor Original here]]> http://www.searchlightcrusade.net/2024/04/first_time_buyer_programs_the_1.html http://www.searchlightcrusade.net/2024/04/first_time_buyer_programs_the_1.html Buying and Selling buyers loan qualification public assistance San Diego Mon, 15 Apr 2024 07:00:00 -0800 Lenders Adding Conditions After Loan Closing I love your site and you are very knowledgeable. I have one quick question for you. I bought a home, I made it through closing, I moved my family into the home. During the process I used some closing cost money afforded to me through the VA loan process and lender to pay off 3 credit cards. I never signed anything that said I had to close those accounts to qualify for the loan or get the house. Now my loan officer told me that I need to go ahead and close those accounts and send him the letters stating that they were paid in full and closed. He said that he needed them so that the loan would make it through auditing and if he didnt get them that the loan would come right back to them and his boss is not going to want to buy that loan back and then it would open up a big can of worms. I closed on the 14th of Sept. Im positive the sellers have already received their money. Which from what I have read means the loan has been funded. I believe that the lenders goal was to sell the loan from the get and me closing the accounts makes the loan more enticing to be purchased and they are trying subtly to make it seem like I could lose my home when in essence they would be stuck with the mortgage that they approved but had no intention on keeping. I just wanted your opinion. If closing them was a condition of the loan, it should have been taken care of in underwriting or funding. If it didn't, and the brokerage has to buy the loan, it's no skin off your nose - it's their own fault for letting it get this far. If it was a condition of the loan, it should have been on the list of conditions put into the loan by the underwriter. I don't volunteer a copy of the outstanding conditions, because I regard meeting those as my responsibility as the loan officer, but I'm always happy to give one out because it shows an involved client that I am on top of things. I do advise people to ask for one before they sign - signing the final documents commits you to that loan (after the three day right of rescission, but there is no rescission period for purchases). It's a good thing if you know what obstacles (if any) are standing in your way before you commit completely like that. There are always the routine funder conditions - verifying cash to close, etcetera, but in general there really shouldn't be anything else in the way of unfulfilled conditions. On those rare occasions there other outstanding conditions, I have previously discussed them with the client and they know what is going on. I recommend against drawing any lines in the sand until you have discussed the matter with an attorney licensed to practice in your state. I am not an attorney, and I don't pretend to be. In general, however, any issues outstanding should have been dealt with prior to actually funding and recording the loan. Once its recorded, they can't call the money back without external cause. There are two possible reasons for the request. One, they screwed up and don't want to be stuck with it. Understandable, but not your issue at this point. If they needed you to close those accounts, the underwriter should have made certain it was done before he passed it on to the funder. That funder should not have put the money to the loan without making certain it was done, or, more likely in the case of a payoff, closed the accounts with the payoff money. Note that closing the accounts would also have required your written permission, which should have been part of the process of getting the loan to that point. But once the loan is closed and recorded, they're telling you that you've done your part, and that everything you're required to do has been done. I have worked in both broker and correspondent lending. In both cases, the underwriter is an employee of the actual lender - not the broker or correspondent. They may be assigned to that broker, correspondent, or even to a subset of loan officers, but they are still an employee of that lender and responsible for seeing that the lender's guidelines are followed before approving the loan. A broker's funder is also a lender employee - the lender is the one putting the money to the loan to make it work, there's not a penny of broker cash involved. A correspondent funder, however, often works for the correspondent, who actually funds the loan and hence gets a better price through the secondary market, but they are still required to make certain all of the underlying lender's guidelines have been followed. A correspondent funder should be even more hard nosed than the lender's own funder because otherwise they are risking the lender not buying the loan, and it eating up that correspondent's line of credit or cash. That has some really bad consequences to the correspondent in terms of costs. The lender not buying the loan is a real concern if the rate/cost tradeoff has gone up since the loan was locked, and may possibly mean the correspondent loses money through not being able to sell the loan for what they thought they could (although it's still not your fault). It has been my experience that correspondent funders are very anal retentive, even by comparison with other funders - which is exactly as it should be. Since at least two cutoffs were missed, my belief is that what's more likely to be going on is that they are hoping for a better price for the loan. In other words, more money, and are hoping you cooperate in order to facilitate that. Once again, talk to an attorney licensed in your state about your particular situation, but my understanding of the general class of events is that it's completely up to you as to how far you cooperate. You did what you were required to do in order to get the loan funded and recorded. If they dropped the ball, it's not your fault, and not really your problem Caveat Emptor Original article here]]> http://www.searchlightcrusade.net/2024/04/lenders_adding_conditions_afte.html http://www.searchlightcrusade.net/2024/04/lenders_adding_conditions_afte.html Mon, 08 Apr 2024 07:00:00 -0800 Buyer's Agency, Due Diligence, and the Illusion of Comity Feeling Misled on Home Price, Buyers Sue Agent
Marty Ummel feels she paid too much for her house. So do millions of other people who bought at the peak of the housing boom.
Knowing only this, I would have no sympathy. This is part of the risk you undertake with any investment - that it may decline in value. There are no guarantees that any investment is a good one. I worked hard to inform potential buyer clients about the state of the market when it was in the danger zone, and it cost me a lot of money. Quarter million dollars, absolute minimum. Most of them just went over to other agents who pretended that we could continue to gain 20 percent plus per year indefinitely, or were too ignorant to know better. Not precisely the most ringing endorsement possible, but it was hard to get people to hold off when the market was going crazy. Fear and Greed. The situation when I originally wrote this article was 180 degrees reversed from that - the best buying opportunity in at least fifteen years, and probably the best we'll ever have from this point forward. I did everything except promise free beer to try and get buyers off the sidelines when it was in their favor, but most people look back at what the market has done recently, not where it is going. Fear and Greed has another side. Getting back to the subject at hand, however, here's the deadly piece of information:
Ms. Ummel claims that the agent hid the information that similar homes in the neighborhood were selling for less because he feared she would back out and he would lose his $30,000 commission.
The question I want to ask is did the buyer's agent actively hide it or was he unaware of it? Not that being unaware is any excuse. If you have a fiduciary duty to someone who's buying a property, how can you not check out what sales there have been in the immediate area in the last few months, at least on MLS? This was a million dollar property, for crying out loud, but it would apply just as strongly to a "cheap" condo. If you're not willing to do the work, you shouldn't take the client. If you're never willing to do the work, why are you in the business? If the agent was aware of these sales but actively hid them, that leaves the realm of negligence and into the realm of active malfeasance. He deserves to lose his license as well as the case, and this would be the wedge that might do it. Now we get to the crux of the matter:
"We have seen so much misrepresentation over the last five years," he said. "So I appreciate where these buyers might be coming from: 'I'm a lowly consumer, you're certified by the state of California, you didn't do X, you didn't do Y, and I got hurt.' "
This is exactly what an agent is agreeing to when they accept the task of agency, real estate or otherwise. This isn't some pick-up game of softball where you pick your friends. Buyer or seller, you're not just picking someone who's going to get a check for thousands of dollars. If that were the case, real estate agency would have died by now. You're picking someone whom you believe is both capable of everything necessary to guard your interests, and willing to speak up even though it may cost them a commission. I get at least one e-email a week complaining about what a rotten job one agent or another did. When I respond back and ask them how and why they chose that agent, the response is always something along the lines of, "I met him and thought he was a good guy." This isn't about who you're going to have a good time with at the football game this afternoon, which that means of choosing might suffice for. You're not choosing a date for the ball, you're picking an alleged professional who's supposed to competently guard your interests on a transaction that's probably several years worth of your earnings. Whether you pay for the property with cash or with a loan, it's still the same number of dollars, and you're still going to have to pay that loan off if something goes wrong. Treat buying real estate like what it is: putting enough money on the line to quite literally beggar you for life if you make a mistake. I wrote an article a while ago titled Which Makes More Difference - Buyer's Agent or Listing Agent? The answer was and is resoundingly that a buyer's agent makes more difference. Yet many people who would never pick a listing agent in such a casual manner will choose somebody they meet at an open house or go without representation, trusting the listing agent to look after their interests. But the listing agent has a contractual obligation to get the seller the highest possible price - not to negotiate it as low as possible. If something is in the seller's interest but against yours, you can bet the seller's interests are going to win. It's a win for listing agents if the buyer doesn't have an agent of their own - for perhaps an hour of extra work, they get paid double, and without taking on any new liability if they're even moderately intelligent. Picking someone you meet at an open house is nearly as bad. HELLO! Earth to prospective buyer! They're a LISTING AGENT with a contractual obligation on behalf of that seller and who knows how many others. If they're not trying their best to sell you that property, they're violating their contract with the seller - but you want an agent who's not only going to tell you about the problems, but also about what it really means to you. There is an irreconcilable conflict of interest there. A good - by which I mean competent as well as ethical - agent will not put themselves or their clients into that kind of situation. I write it into every contract that I will not represent both sides in the same transaction, and make it clear to prospective listings exactly where the line is. If I bring someone I've contracted to represent as a buyer to one of my own listings, I am breaking that fiduciary duty to one or the other of them - perhaps both. It's one thing if someone calls me out of the blue asking to see a property I have listed. It's my job to show the property. It's something completely different to bring someone I already have a buyer's representation agreement with to that listing with an eye towards possibly buying. The same objection applies if I try and get that prospective buyer who called out of the blue to agree to let me represent them in buying. Who gets less than my best efforts, and is that something you want as a consumer with hundreds of thousands of dollars on the line? That's what you're volunteering for when you pick a buyer's agent in either one of these fashions. It goes back to the illusion of comity. Agents are salespersons, and it's much easier to get a sale, and particularly a better price, if you pretend everybody here is everybody else's friend. In fact, that's pretty much the only way to make Dual Agency appear even vaguely palatable. Give someone an obvious path of least resistance. But let's consider the nature of the item at issue: A middle of the line detached single family residence is $500,000. How many people would you trust not to try to finagle an extra 2%, when it means they make an extra $10,000 - two months gross wages - whether they are buyer or seller? To very politely and non-confrontationally slip away with an extra ten percent that means $50,000? I've seen people finagled out of forty percent of the purchase price by a sharp or lucky listing agent, and they never did figure it out. I went out and interviewed a few on purpose not too long ago on the subject of their recent purchases. Whether out of ego defense or just sheer ignorance, every single one of them was very happy with the purchase, and they told me they would do the same thing again. Agents fall into the trap of "go along to get along" as well. It's one thing to be collegial. Two boxers each out to pummel the other into senselessness can be polite. The formality of the old code duello, governing two gentlemen so angry at each other that they're going to shed blood to settle the matter, was faultlessly polite. Often, though, agents go too far and get into you scratch my back and I'll scratch yours mode "You don't beat me up with your buyer, I don't beat you up with mine, and only the buyers get hosed, which we'll make good when they want to sell it with a whole new set of suckers buyers." The whole thing turns into a repeating cycle of suckers who don't know any better. Well pardon me for not believing that just because you were taken advantage of in the purchase of the property does not entitle you to take advantage of someone else when you sell. Two wrongs still don't make a right, and they never have. The property is only worth what a buyer is willing to pay - if you don't like what is offered, you need to persuade me and them it's worth more - and to do that, you have to risk that I will persuade you it's worth less, because that's what negotiation is. Neither side gets to bully the other, and there are always other properties on the market. The other alternative for the seller is to find a buyer willing to offer more, which brings us back to the illusion of comity again. In this market, that's the real trick, isn't it? It's no coincidence that people find out about issues like this primarily during buyer's markets. When fear and greed are driving prices crazy, a bigger fool is very likely to materialize. When it takes something on the order of a divine command to get someone to be willing to buy, those who are willing to buy have thing much more to their liking. To give the mass media credit where credit is due, they have managed to cover the basic point that listing agents represent sellers, and have a responsibility to the sellers, not the buyers. Thirty years ago, it's my understanding that Dual Agency was far more common, and the illusion of comity less likely to be dispelled, where now, roughly two-thirds of all transactions at least do have a buyer's agent involved. But what if that buyer's agent doesn't understand the difference between comity and collegiality? That seems to be the most likely explanation for the situation illustrated in the NY Times article I linked at the beginning of this piece. To be fair, many agents on the listing side suffer this fault as well. The illusion seems to be essentially that as long as we keep it all in the family, nothing will go wrong. Furthermore, the buyers in the article were in exactly the same situation as the ones I interviewed on their overpriced purchases. Fat, dumb, happy - and ignorant, until something went obviously wrong. When prices fell, they went looking for someone else to fix their bad situation upon. And if prices falling was the only concern, neither I nor anyone else should have any sympathy whatsoever for them. But it wasn't just the bad luck of a down market, forseeable or not. This agent not only did a horrible job of discharging his fiduciary duty, he didn't tell his victims about relevant facts which would have made that failure obvious before the transaction was consummated. It's interesting to note that had he admitted his failure, he probably still would have gotten paid, because even if the buyers had moved on, they probably would have kept him - people do the silliest things. However, this was a real estate transaction, where pretty much everything is a matter of public records that are kept forever. The buyers or their lawyer did the work and dug into the records, and predictably, hit paydirt. The agent undertook the duty, should have understood the duty, and basically decided to act like a minimum wage worker with a fax machine despite the fact he was paid $30,000 to guard the buyer's interest. Hello! That commission check is not a reward for a winning personality! Well, I suppose in a market rising 20% per year where it's hard to do anyone lasting damage, it can be, much to the eventual distress of their client. Because no market can sustain that kind of increase over time unless the income of those able to buy the property keeps pace. I don't need to ask for a judge's ruling on that one. People want their daily routine to be without confrontation, violence, or real argument. It's a temptation to just go along. The little stuff - a dime missing out of your change, having to sit through an extra cycle of the traffic signal - just isn't worth making a big deal out of. It's a path of least resistance thing. But when you accept the responsibility for someone else's interests, it's not your call to make, and we're usually talking months worth of wages, occasionally years. I may advise someone that the deal is about as good as I think we're going to get, but I still have to spell it all out. That's why I make the money I do for the work I do when I'm working on a full service basis - my services really are reliably worth several times what I make to my buyer clients. And that's why the agent that just sits in the office with a fax machine can rebate half or two-thirds of that co-operating broker's percentage, and why I am perfectly happy to work on that basis if that's what a particular buyer wants - if my only liability is passing along faxes, I'm making ten times more per hour for less liability. I've written about this before, but pay attention to what you're getting in services as well as what you're spending for them. The divine only knows how many other people bought property and are now in this situation, and how many lawsuits we're going to see because of it. I have zero sympathy for the agents and brokerages involved. They have richly earned whatever judgments are rendered against them and any license action under taken by the Department of Real Estate. But the consumers involved assisted their own downfall for just taking the obvious, apparently easy path to a transaction, by not taking the time to shop for a good buyer's agent in the first place. If you were getting ready to buy a property, which situation would you rather be in this time next year? Find a dedicated buyer's agent who will guard your interests while explaining what you need to know, or just take the path of least resistance? As of this moment, the folks the New York Times wrote about are out $75,000 in legal fees, and who knows how much in property value, their own time, and the quality of their lives, because they chose the latter path. Nor does anyone know at this point how much of that they're going to get back. But speaking as someone who knows intimately the endpoints and results of both paths, I know which path I'd choose. Caveat Emptor Original article here]]> http://www.searchlightcrusade.net/2024/04/buyers_agency_due_diligence_an.html http://www.searchlightcrusade.net/2024/04/buyers_agency_due_diligence_an.html Buying and Selling buyer's agent buyers law prevention strategy Mon, 01 Apr 2024 07:00:00 -0800